<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _____________
Commission file number 0-26074
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SPYGLASS, INC.
--------------
(Exact name of registrant as specified in its charter)
Delaware 37-1258139
- ----------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1240 E. Diehl Road, 4th Floor, Naperville, IL 60563 (708) 505-1010
------------------------------------------------------------------
(Address of principal executive offices, zip code, registrant's telephone
number, including area code)
----------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 5, 1997
- -------------------------------------- -------------------------------
Common Stock (par value $.01 per share) 12,005,426
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SPYGLASS, INC.
FORM 10-Q
INDEX
<TABLE>
<S> <C> <C>
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets
December 31, 1996 and September 30, 1996 3
Consolidated Statements of Operations
Three Months Ended December 31, 1996 and 1995 4
Consolidated Statement of Changes in Stockholders' Equity
Three Months Ended December 31, 1996 5
Consolidated Statements of Cash Flows
Three Months Ended December 31, 1996 and 1995 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
2
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SPYGLASS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
(In thousands) 1996 1996
- ------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,438 $ 16,490
Short-term investments 16,094 17,593
Accounts receivable, net of allowance for
doubtful accounts of $350 and $470, respectively 4,407 7,608
Prepaid expenses and other assets 1,935 2,094
Deferred income taxes 1,039 -
-------- -----------
Total current assets 40,913 43,785
Properties, net 4,197 3,377
Long-term accounts receivable 628 618
Other assets 1,408 989
-------- -----------
TOTAL ASSETS $ 47,146 $ 48,769
======== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,130 $ 2,160
Deferred revenues 1,614 1,453
Accrued compensation and related benefits 562 952
Accrued expenses and other liabilities 232 103
-------- -----------
Total current liabilities 4,538 4,668
Long-term deferred revenues 158 210
-------- -----------
Total liabilities 4,696 4,878
-------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares authorized,
none issued - -
Common stock, $.01 par value, 50,000,000 shares
authorized, 11,912,015 and 11,819,545 shares
issued and outstanding, respectively 119 118
Additional paid-in capital 39,444 39,341
Retained earnings 2,887 4,432
-------- -----------
Total stockholders' equity 42,450 43,891
-------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,146 $ 48,769
======== ===========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
3
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SPYGLASS, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
(In thousands, except per share amounts) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net revenues:
World-Wide Web technology revenues $ 3,014 $ 4,322
Service revenues 871 431
-------- -------
Total net revenues 3,885 4,753
Cost of revenues:
Cost of technology revenues 279 483
Cost of service revenues 180 -
-------- -------
Total cost of revenues 459 483
-------- -------
Gross profit 3,426 4,270
Operating expenses:
Sales and marketing 1,814 1,317
Research and development 2,925 1,191
General and administrative 1,618 900
-------- -------
Total operating expenses 6,357 3,408
-------- -------
Income (loss) from operations (2,931) 862
Other income 439 462
-------- -------
Income (loss) before income taxes (2,492) 1,324
Income tax provision (benefit) (947) 482
-------- -------
Net income (loss) $ (1,545) $ 842
======== =======
Earnings (loss) per common share and equivalents:
Net income (loss) $ (0.12) $ 0.07
Weighted average number of common
shares and equivalents outstanding 12,694 12,929
======== =======
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
4
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SPYGLASS, INC.
Consolidated Statements of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) SHARES AMOUNT CAPITAL EARNINGS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996 11,819,545 $ 118 $ 39,341 $ 4,432
Exercise of stock options 92,470 1 83
Issuance of incentive stock options 20
Net income (loss) (1,545)
---------- -------- -------- --------
BALANCE AT DECEMBER 31, 1996 11,912,015 $ 119 $ 39,444 $ 2,887
========== ======== ======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
5
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SPYGLASS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
(In thousands) 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,545) $ 842
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 374 135
Deferred income taxes (1,039) (1,746)
Incentive stock option compensation 20 21
Other - (201)
Changes in operating assets and liabilities:
Accounts and long-term receivables 3,191 (448)
Prepaid expenses and other assets (260) (48)
Accounts payable (30) (139)
Deferred revenues 109 62
Accrued compensation and related benefits (390) (3)
Accrued expenses and other liabilities 129 (274)
-------- --------
Net cash provided by (used in) operating activities 559 (1,799)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments, net activity 1,499 -
Capital expenditures (1,194) (230)
-------- --------
Net cash provided by (used in) investing activities 305 (230)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, including
tax related benefits 84 2,565
-------- --------
Net cash provided by financing activities 84 2,565
-------- --------
Net increase in cash and cash equivalents 948 536
Cash and cash equivalents at beginning of period 16,490 34,872
-------- --------
Cash and cash equivalents at end of period $ 17,438 $ 35,408
======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
6
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SPYGLASS, INC.
FORM 10-Q
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1996
NOTE 1. BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements have been
prepared by the Company in accordance with generally accepted
accounting principles, although certain information and footnote
disclosures normally included in the Company's audited annual
consolidated financial statements have been condensed or omitted. In
the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of
normal recurring items) necessary for a fair presentation of the
Company's financial position, results of operations and cash flows at
the dates and for the periods indicated. It is suggested that these
interim financial statements be read in connection with the audited
consolidated financial statements for the fiscal years ended September
30, 1996, 1995 and 1994 which are included in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1996.
The results of operations for the interim period ended December
31, 1996 are not necessarily indicative of the results of operations
to be expected for the full fiscal year.
NOTE 2. MICROSOFT AMENDMENT
On January 21, 1997, the Company amended its license
arrangement with Microsoft Corporation ("Microsoft"). This amendment
converted Microsoft's existing license for the Spyglass Mosaic browser
technology into a fully paid-up license in consideration of an
additional $8,000,000 payment from Microsoft. This payment consisted
of $7,500,000 in cash and $500,000 in software and product
maintenance. Spyglass will recognize the revenue from this payment in
the second quarter of fiscal year 1997 ending March 31, 1997.
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SPYGLASS, INC.
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Spyglass, Inc. ("Spyglass" or the "Company") was organized as an Illinois
corporation in February 1990 and reincorporated in Delaware in May 1995.
Spyglass entered the Internet market during fiscal 1994 and from fiscal 1994
through fiscal 1996, focused its efforts on developing, marketing and
distributing World Wide Web ("WWW" or "Web") client and server technologies
for incorporation into a variety of Internet-based products and services. In
fiscal 1997, the Company is focusing on the development, marketing and
distribution of its technologies to the Internet device market. This market
consists of non-PC devices and the underlying Internet infrastructure.
Spyglass markets Internet connectivity products to a variety of companies such
as real time operating system (RTOS) vendors and consumer and industrial device
manufacturers in the device segment of this market and Internet infrastructure
and application products to a variety of companies such as the Regional Bell
Operating Companies (RBOCs), telephone companies, cable companies, Internet
Service Providers (ISPs) and internetworking hardware providers in the
infrastructure segment of this market. These technologies are designed to be
embedded within Internet devices, software applications and on-line services to
bring Web functionality to these products and services. Spyglass technology
offerings include Spyglass Mosaic, Spyglass Web Server ("Web Server"),
SurfWatch ProServer, SurfWatch and SurfWatch for Microsoft Proxy Server which
began shipping in January 1997. Spyglass Web technology can be found embedded
inside various end-user products, including but not limited to televisions,
database applications, set-top boxes, CAD-CAM software, network computers and
consumer kiosks. Prior to fiscal 1994, the Company focused its efforts on the
scientific data visualization tools market; this product line was sold in
fiscal 1995.
Spyglass acquired Stonehand Inc. ("Stonehand"), OS Technologies
Corporation ("OS Tech") and SurfWatch Software, Inc. ("SurfWatch"), in February
1996, April 1996 and April 1996, respectively, in transactions accounted for as
pooling of interests. All financial information presented includes the
accounts and results of operations of these companies for all periods
presented.
The Company pays royalties to the University of Illinois with respect to
licenses of Spyglass Mosaic. Under its agreement with the University of
Illinois, the Company's royalty rate decreased effective January 1, 1995 from
the rate previously in effect. In addition, the Company pays royalties to RSA
Data Security, Inc. with respect to licenses of the Company's technologies
containing certain RSA code; Sun Microsystems, Inc. with respect to licenses of
the
8
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Company's technologies containing certain Java code and to Versant
Industries, Inc with respect to licenses of SurfWatch ProServer. These
royalties are reflected in cost of revenues.
This Form 10-Q contains a number of forward-looking statements. Any
statements contained herein (including without limitation statements to the
effect that the Company or its management "believes", "expects",
"anticipates", "plans" and similar expressions) that are not statements of
historical fact should be considered forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below.
The Company has announced an increased strategic focus on the Internet
device market. The Company is focused on the development and marketing of
technologies that enable devices, such as business productivity products,
consumer electronic devices and office equipment, to access the Web. Because
this is a new and undeveloped market, there can be no assurance as to the
extent of the demand for product offerings similar to those of the Company,
or the extent to which the Company will be successful in penetrating this
market. Moreover, the Company expects that its revenues may be adversely
affected during fiscal 1997 as the Company redirects its business strategy
toward vendors of Internet-enabled devices, rather than vendors of desktop
software applications. In addition, the Company expects to significantly
increase its expenditures in product development, marketing and sales in
order to position itself as a leader in the Internet device market, which
should negatively impact net income during fiscal 1997.
Other factors that may affect the Company's future results of operations
include, but are not limited to, the extent to which the market for Internet
services and products develops and grows; competition from other companies that
develop and market Web technologies, as well as from potential OEM customers
which choose to internally develop Web technologies; the Company's ability to
develop and introduce new products, such as SurfWatch for Microsoft Proxy
Server; the success of any products introduced by the Company in the future;
the performance of the Company's customers who incorporate the Company's
technology into their products; claims of infringement of third party
proprietary rights resulting in restrictions on the Company's ability to
distribute certain products or to include particular features in its products,
or requiring the Company to pay royalties in connection with the distribution
of its products; and any adverse developments affecting the computer or
communications industries in general.
The Company's quarterly operating results have varied and they may
continue to vary significantly depending on factors such as the timing of
significant license agreements, the terms of the Company's licensing
arrangements with its customers and the timing of new product introductions and
upgrades by the Company and its competitors. The Company typically structures
its license agreements with customers to require commitments for a significant
minimum number of licenses, and license revenues are recognized as the
committed licenses are purchased. The Company typically realizes the greatest
proportion of net revenues in the first
9
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quarter of a license arrangement. Additional revenues from a customer
will not be earned unless and until the initial committed levels are exceeded.
The Company's revenues in any quarter will therefore depend in significant part
on its ability to sell licenses to new customers in that quarter in addition to
the timing of product deployment by its customers. The Company typically
structures its professional service agreements with customers to recognize
revenue on the percentage of completion method of accounting. The Company's
expense levels are based in part on expectations of future revenue levels and
any shortfall in expected revenue could therefore result in a disproportionate
decrease in the Company's net income.
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH THREE MONTHS ENDED DECEMBER
31, 1995
Technology revenues for the three months ended December 31, 1996 decreased
$1,308,000 or 30%, to $3,014,000 compared to $4,322,000 for the three months
ended December 31, 1995. This decrease in revenues was due primarily to a
significant decline in revenues from vendors of desktop software applications
as the Company has increased its strategic focus on the Internet device market.
The Company did not recognize any revenue in the quarter ended December 31,
1996 from Microsoft in excess of the minimum quarterly payment due under the
license agreement with Microsoft with respect to the licensed Spyglass software
used in the Microsoft Internet Explorer product. Subsequent to the quarter
end, on January 21, 1997, the Company amended its license arrangement with
Microsoft Corporation. This amendment converted Microsoft's existing license
for the Spyglass Mosaic browser technology into a fully paid-up license in
consideration of an additional $8,000,000 payment from Microsoft. This payment
consisted of $7,500,000 in cash and $500,000 in software and product
maintenance. Spyglass will recognize the revenue from this payment in the
second quarter of fiscal year 1997 ending March 31, 1997.
Service revenues for the three months ended December 31, 1996 increased
$440,000, or 102%, to $871,000 compared to $431,000 for the three months
ended December 31, 1995. During the quarter ended June 30, 1996, the Company
formed a Partner Services group to service the Internet device market. This
group is comprised of customer support and professional services. The
increase in service revenues was due primarily to the increase in the number
of professional services agreements entered into by the Company. Revenues
from professional services approximated $303,000 in the current quarter. The
Company expects service revenues to increase both in absolute dollars and as
a percentage of revenues during fiscal 1997.
Gross profit as a percentage of revenues was 88.2% for the three months
ended December 31, 1996 compared to 89.8% for the three months ended December
31, 1995. This decrease in gross profit percentage resulted primarily from an
increase in service revenues, as a percentage of revenues, which have
significantly higher costs as a percentage of revenues than Spyglass technology
revenues. The Company expects gross profit, as a percentage of revenues, to
decline throughout fiscal 1997 as service revenues increase as a percentage of
revenues.
10
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Sales and marketing expenses for the three months ended December 31,
1996 increased $497,000, or 38%, to $1,814,000 from $1,317,000 for the three
months ended December 31, 1995, and increased as a percentage of revenues to
46.7% from 27.7%. The increased expenses reflected staff additions in sales,
marketing, and customer support (which increased the cost of salary and
related personnel expenses to $837,000 from $590,000 between these periods)
to support the sales, marketing and support of Spyglass product lines in
addition to higher commission costs (which increased to $187,000 from
$116,000 between these periods) due primarily to a change in the commission
structure of Spyglass as well as a change in the former commission structures
of Stonehand, OS Tech and SurfWatch to conform to the commission structure of
Spyglass. Additionally, certain marketing initiatives, which included a
print campaign to increase awareness of its products among the business and
technology communities, accounted for $124,000 of the increase in sales and
marketing expenses for the three months ended December 31, 1996 as compared
to the three months ended December 31, 1995. The Company expects to increase
its sales and marketing expenses throughout fiscal 1997 as the Company
focuses its efforts on the Internet device market.
Research and development expenses for the three months ended December
31, 1996 increased $1,734,000, or 146%, to $2,925,000 from $1,191,000 for the
three months ended December 31, 1995 and increased as a percentage of
revenues to 75.3% from 25.1%. The increase in research and development costs
was due primarily to costs of increased personnel associated with
enhancements to existing technologies as well as the development of new
technologies. The Company believes that it is necessary to make significant
investments in research and development and acquisitions of new technologies
to remain competitive in the Internet software business and establish a
leadership position in the emerging Internet device market. The Company's
current plans include increasing research and development expenses throughout
fiscal 1997.
General and administrative expenses for the three months ended December
31, 1996 increased $718,000, or 80%, to $1,618,000 from $900,000 for the three
months ended December 31, 1995 and increased as a percentage of revenues to
41.6% from 18.9%. In order to effectively and rapidly transition the focus of
the Company from the desktop market to the Internet device market it was
necessary to incur significantly more conference, travel and meeting expenses,
which increased general and administrative expenses by $324,000 for the three
months ended December 31, 1996 as compared to the three months ended December
31, 1995. Additional increases in general and administrative costs were due to
an increase in personnel (which increased salary and related personnel expenses
to $508,000 from $394,000) required to support the growth of the Company and an
increase in bad debt expense (which increased to $246,000 from $48,000) related
to certain customer accounts. The increase in bad debt expense was primarily
due to the write-off of accounts for vendors of desktop software products.
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The Company recorded an income tax benefit of $947,000 for the three
months ended December 31, 1996, compared to a provision for income taxes of
$482,000 for the three months ended December, 1995, as a result of the
Company's loss before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had no debt and had cash and cash
equivalents of $17,438,000, short-term investments of $16,094,000 and working
capital of $36,375,000. The Company's operating activities provided cash of
$559,000 for the three months ended December 31, 1996 and used cash of
$1,799,000 for the three months ended December 31, 1995.
The Company's net accounts receivable decreased to $5,035,000 at December
31, 1996 from $8,226,000 at September 30, 1996. This decrease was primarily
due to a decrease in revenues in addition to increased collection efforts of
the Company.
The Company's capital expenditures totaled $1,194,000 and $230,000 for the
three months ended December 31, 1996 and 1995, respectively. This increase
consists primarily of computer equipment, furniture and leasehold improvements
relating to the continued growth of the Company. The Company has entered into
agreements with various vendors to improve and enhance its finance, human
resources and customer support information systems. The Company does not
believe that its capital expenditure commitments are material to its overall
financial position or operating results.
The Company believes that its current cash and cash equivalents, together
with funds expected to be generated from operations, will be sufficient to
finance the Company's operations through at least the twelve-month period
ending December 31, 1997.
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SPYGLASS, INC.
FORM 10-Q
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
The exhibits are listed in the accompanying Index to Exhibits immediately
following the signature page.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter covered by this Report on
Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Spyglass, Inc.
--------------
Registrant
Date: February 13, 1996 /s/ Gary Vilchick
------------------
Gary Vilchick
Executive Vice President, Finance,
Administration and Operations and
Chief Financial Officer
14
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.1 Amendment No. 2 to the Technology Cooperation Agreement,
Including Amendment of OEM/Source License Agreement
between the Registrant and Microsoft Corporation, dated
January 21, 1997.
10.2(1) Amendment No. 1 to the OEM/Source License Agreement
between the Registrant and Microsoft Corporation, dated
September 26, 1995. (3)
10.3(2) OEM/Source License Agreement, dated December 12, 1994,
between the Registrant and Microsoft Corporation.
10.4(1) Technology Cooperation Agreement, Including Amendment of
OEM/Source License Agreement between the Registrant and
Microsoft Corporation dated December 6, 1995 (3)
10.5(4)(+) Amendment No. 1, dated September 30, 1996, to the
Technology Cooperation Agreement, Including Amendment of
OEM/Source License Agreement between the Registrant and
Microsoft Corporation, dated December 6, 1995
27 Financial Data Schedule
(1) Incorporated herein by reference from the Company's Quarterly Report
Form 10-Q for the quarter ended December 31, 1995, as amended by a
Quarterly Report on Form 10-Q/A filed on May 17, 1996.
(2) Incorporated herein by reference from the Company's Registration Statement
on Form S-1 (File No. 33-92174)
(3) Confidential treatment previously granted by the Securities and Exchange
Commission as to certain portions
(4) Incorporated herein by reference from the Company's Annual Report on Form
10-K for the year ended September 30, 1996.
(+) Confidential treatment requested as to certain portions.
</TABLE>
15
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EXHIBIT 10.1
AMENDMENT #2
to
TECHNOLOGY COOPERATION AGREEMENT, INCLUDING AMENDMENT
OF
OEM/SOURCE LICENSE AGREEMENT
This Amendment #2 is made as of January 21, 1997 between Microsoft
Corporation, a Washington corporation having its principal place of business at
1 Microsoft Way, Redmond, Washington ("Microsoft") and Spyglass, Inc., an
Illinois corporation located at 1240 East Diehl Road, Naperville, Illinois
60563 ("Spyglass").
Recitals
A. WHEREAS, Microsoft and Spyglass have entered into an OEM/Source
License Agreement effective December 9, 1994, as amended by the parties
in Amendment #1 effective September 26, 1995, and as further amended by the
Technology Cooperation Agreement, Including Amendment of OEM/Source License
Agreement effective December 6, 1995, amended by the parties in Amendment #1
effective September 30, 1996, regarding the license to and distribution by
Microsoft of Spyglass' and NCSA's Mosaic browser software and related
technology (collectively, the "Contract").
B. WHEREAS, Microsoft and Spyglass wish to clarify the amount of
royalties owed to date by Microsoft to Spyglass for distribution of Licensed
Product (including that form of Licensed Product distributed as Standalone
Product) licensed to Microsoft by Spyglass under the Contract.
C. WHEREAS, Microsoft and Spyglass wish to convert all payments made
and/or otherwise to be made by Microsoft to Spyglass (whether per unit
royalties, prepaid royalties, minimum commitments or otherwise) to the
consideration specified herein, in exchange for a fully paid up license for
Licensed Software (including Standalone Product) as specified herein.
Agreement
NOW THEREFORE, the parties agree as follows:
1. Microsoft shall pay to Spyglass the additional sum of Seven Million,
Five Hundred Thousand Dollars ($7,500,000) (the "BuyOut Amount") on or before
seven business (7) days after the date of this Amendment.
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2. Microsoft shall provide Spyglass with up to Five Hundred Thousand
Dollars ($500,000) of software (a) commercially released and/or distributed by
Microsoft and (b) and/or product maintenance, valued at estimated street price,
provided that Spyglass places its order or orders for such software no later
than the second anniversary of this Amendment.
3. Spyglass shall issue two press releases no later than January 23,
1997, substantially in the form as attached hereto as Exhibits A and B,
respectively, and, if changed from such form, Microsoft shall approve in
writing such changes to the final form and text of both releases prior to their
release. In the event that Microsoft does not approve such changes, and such
changed releases are made available to any third party, this Amendment shall be
automatically rescinded, and shall be of no legal force or effect.
4. In consideration of and upon full payment by Microsoft to Spyglass of
the sum of Ten Million, Six Hundred Thousand Dollars ($10,600,000)
(composed of the BuyOut Amount, Two Million, Seven Hundred Thousand Dollars
($2,700,000) which has been paid by Microsoft to Spyglass, and Four Hundred
Thousand Dollars ($400,000) which will be paid on or before February 15) and
other consideration as specified in paragraphs 2 and 3 above, Spyglass shall be
deemed to have granted to Microsoft a fully paid up, perpetual, irrevocable
license to the Licensed Product (including the Standalone Product), and
associated trademark, for use by Microsoft pursuant to the terms of Section 2
of the Contract. Consequently, Section 1.3 (Royalties for Standalone Product)
of that portion of the Contract known as the Technology Cooperation Agreement,
Including Amendment of OEM/Source License Agreement, is deleted in its
entirety, however Microsoft shall have a license for the Standalone Product as
specified by the definition of the term in Section 1.1(a) of such Agreement and
pursuant to Section 2 of the December 9, 1994 Agreement as subsequently amended
by other Contracts.
5. Spyglass, on behalf of itself and each of its current or former
subsidiaries, affiliates, legal representatives, agents, shareholders,
directors, officers, employees, predecessors, successors and assignees
(collectively the "Spyglass Releasors"), hereby releases and forever discharges
Microsoft and each of its current of former subsidiaries, affiliates, legal
representatives, agents, insurers, shareholders, directors, officers,
employees, predecessors, successors and assignees (collectively the "Microsoft
Releasees") from any, every and all claims, actions, causes of action, suits,
liabilities, or demands, of any kind, character or nature whatsoever, known or
unknown, fixed or contingent, which the Spyglass Releasors may have against any
or all of the Microsoft Releasees arising in whole or in part out of any of all
prior dealings between the parties including without limitation those related
in any way to the Contract and/or those dealings described in Recital B above.
6. Microsoft, on behalf of itself and each of its current or former
subsidiaries, affiliates, legal representatives, agents, shareholders,
directors, officers, employees, predecessors, successors and assignees
(collectively the "Microsoft Releasors", hereby releases and forever discharges
Spyglass and each of its current or former subsidiaries, affiliates, legal
representatives, agents, insurers, shareholders, directors, officers,
employees, predecessors, successors and assignees (collectively the "Spyglass
Releasees") from any, every and all claims,
2
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actions, causes of action, suits, liabilities, or demands, of any kind,
character or nature whatsoever, known or unknown, fixed or contingent, which
the Microsoft Releasors may have against any or all of the Spyglass Releasees
arising in whole or in part out of any or all prior dealings between the parties
including without limitation those related to Spyglass public statements
regarding Microsoft's performance pursuant to the Contract.
7. The Spyglass Releasors, and each of them, agree that they will not
sue, or otherwise prosecute the Microsoft Releasees with respect to the claims
released in paragraph 5 of this Amendment. The Microsoft Releasors, and each
of them, agree that they will not sue, or otherwise prosecute the Spyglass
Releasees with respect to the claims released in paragraph 6 of this Amendment.
8. Microsoft and Spyglass each hereby represent and warrant that:
(a) the person or persons executing this Amendment has full power and
authority to bind the person signing or on whose behalf he or she signs this
Amendment, and each is duly authorized to execute and deliver this Amendment;
(b) upon execution and delivery of this Amendment, this Amendment will
have been duly entered into by each Releasor, will constitute as against all
and each Releasee a valid, legal and binding obligation of each Releasor
enforceable against him, her or it in accordance with the terms herein;
(c ) it has not heretofore assigned, transferred or subrogated or
purported to assign, transfer, or subrogate, to any person or entity any of the
claims released in paragraphs 5 and 6, respectively.
9. Except for press releases as approved as specified in paragraph 3, the
parties shall maintain the confidentiality of the terms of this Amendment,
including without limitation the fact that financial consideration is being
paid or the amount or magnitude thereof, until such time as disclosure is
required by compulsion of legal process or an order of a court of competent
jurisdiction or to the extent that disclosure is necessary to report financial
information to Federal and/or State taxing or securities regulatory
authorities. Except for press releases approved as specified in paragraph 3,
neither party shall issue a press release or otherwise solicit or initiate
media coverage related to the negotiation and/or terms of this Amendment, and
neither party shall disparage the name of the other related to matters arising
out of the Contract.
10. The parties hereby agree to perform all further acts and to execute
all documents necessary or desirable to effect the terms of this Amendment.
11. This Amendment shall be interpreted under the laws of the State of
Illinois, without regard to conflict of law principles.
3
<PAGE> 4
12. This Amendment and the Contract constitute the entire agreement
among the parties hereto related to the subject matter hereof. All other prior
agreements, representations, correspondence, discussions and understandings of
the parties are merged herein and made a part hereof. Except as otherwise
provided herein, all terms and conditions of the Contract shall remain in full
force and effect. This Amendment shall not be amended or modified in any way
except in writing signed by the parties hereto. Each of the parties understands
that if any fact with respect to any matter covered by this Amendment is found
to be other than, or different from, the facts now believed by them to be true,
each of the parties expressly accepts and assumes the risk of some possible
difference in fact and agrees that this Amendment shall be and remain in effect
as between the parties, notwithstanding such differences in fact.
13. Each of the parties agrees to pay its own attorneys' fees arising
out of this Amendment.
14. Unless otherwise defined, all capitalized terms used herein shall
have the same meaning as in the Contract.
15. This Amendment shall be binding upon, and inure to the benefit of,
the parties hereto and their respective successors and assigns.
16. This Agreement my be executed in counterparts and such counterparts
shall be deemed to constitute a single agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the day and year first above
written.
MICROSOFT CORPORATION SPYGLASS, INC.
By: /s/ Paul Maritz By: /s/ Doug Colbeth
- ------------------------------- -----------------------------------
Print Name: Paul Maritz Print Name: Doug Colbeth
- ------------------------------- -----------------------------------
Title: Group VP Title: President
- ------------------------------ -----------------------------------
4
<PAGE> 5
EXHIBIT A
to
Amendment #2
to
Technology Cooperation Agreement, Including Amendment
of
OEM/Source License Agreement
FOR IMMEDIATE RELEASE CONTACT: Randy Pitzer
---------------------
630.245.6500
Amanda Stokes
630.245.6512
Spyglass, Inc.
SPYGLASS(R) ANNOUNCES EXTENSION OF STRATEGIC RELATIONSHIP WITH
MICROSOFT(R) FOR THE BURGEONING DEVICE MARKETPLACE
Naperville, Ill. -- Wednesday, January 22, 1997 - Spyglass Inc. announced today
that it and Microsoft Corp. are extending the Internet technology relationship
they formed over two years ago to now focus on open standards for the embedded
systems marketplace.
The companies intend to work together on open standards for such
important issues as HTML for TVs and other devices. In addition, both
companies intend to evaluate each other's technology for potential
cross-licensing and distribution purposes. Spyglass also announced that its
Professional Services group will perform integration services for the Microsoft
Windows(R) CE operating system.
Additionally, Spyglass announced that its entire line of Infrastructure Server
products, introduced several weeks ago as part of its new product strategy for
the device market, will be offered for use on Windows NT(R), including Spyglass'
revolutionary content conversion technology for devices. Spyglass also
announced that the Spyglass MicroServer, an embeddable device Web server, will
run on Windows CE.
"We are pleased to extend our relationship with Spyglass," said Paul Maritz,
Microsoft's Group VP. "Our relationship was important to both companies'
initial success in the Internet market
<PAGE> 6
and we expect this extension to be just as successful as we begin to
realize the great potential of the embedded systems market."
"The market opportunity for devices that need to connect to the Web for both
viewing and serving up content is tremendous," said Douglas Colbeth, Spyglass
president and CEO. "This market not only requires Spyglass to develop core
technologies but to work with leading technology companies like Microsoft
because the device manufacturers need a wide array of technology and
integration services to create solutions."
SPYGLASS INC.
Spyglass Inc. (NASDAQ: SPYG) provides software and services to make devices
work with the World Wide Web. Among Spyglass' OS device customers are
Integrated Systems, Inc., Lynx Real-Time Systems, Inc., Microware Systems Corp.
and QNX Software Systems, Ltd. Other customers include BellSouth, Computer
Associates, Inc., Digital Equipment Corp., IBM Corp., Microsoft Corp., Oracle
Corp. and WebTV. Spyglass headquarters are located at 1240 E. Diehl Road,
Naperville, Ill. 60563; telephone: 630.245.6500; fax: 630.245.6693; press email
inquiries: [email protected]; Web server: http://www.spyglass.com.
(January 1997)
Spyglass is a registered trademark of Spyglass, Inc. The Spyglass logo and
"Make the Net Work" are trademarks of Spyglass, Inc. in the United States and
other countries. Mosaic is a trademark of the University of Illinois.
Microsoft, Windows and Windows NT are registered trademarks of Microsoft Corp.
(Other products and brand names are trademarks of registered trademarks of
their respective companies.) This release contains information about
management's future expectations, plans and prospects which constitute
forward-looking statements for purposes of the safe harbor provisions under The
Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from those indicated by these forward-looking statements as a result
of various important factors which are discussed in the company's annual
report on Form 10-K for the year ended September 30, 1996, which is on file
with the SEC.
<PAGE> 7
EXHIBIT B
to
Amendment #2
to
Technology cooperation Agreement, Including Amendment
of
OEM/Source License Agreement
FOR IMMEDIATE RELEASE CONTACT: Randy Pitzer
---------------------
630.245.6500
Amanda Stokes
630.245.6512
Spyglass, Inc.
SPYGLASS(R) REPORTS FIRST QUARTER 1997 FINANCIAL RESULTS; ANNOUNCES
RE-STRUCTURING OF MICROSOFT(R) LICENSING AGREEMENT
PROVIDES UPDATE ON PROGRESS IN INTERNET-DEVICE MARKET
Naperville, Ill. -- Wednesday, January 22, 1997 - Spyglass Inc. (NASDAQ: SPYG)
today reported financial results for the first quarter of fiscal 1997. The
company reported revenues of $3.9 million for the three months ended December
31, 1996, as compared to revenues of $4.8 million for the same period last
year. The company also reported a net loss of $1.5 million, or 12 cents per
share, versus net income of $842,000, or 7 cents per share, for the same period
a year ago.
Spyglass also stated that it did not recognize any revenue in the
quarter from Microsoft in excess of the minimum quarterly payment due under the
license agreement with Microsoft with respect to the licensed Spyglass software
used in the Microsoft Internet Explorer product for the Apple Macintosh(R) and
Microsoft Windows(R) 3.1. However, Microsoft and Spyglass said today that the
two companies had reached agreement for a full buyout of all current and
future royalties with a one-time payment of $8 million consisting of $7.5
million in cash and $500,000 in software and maintenance to Spyglass in
exchange for the fully paid up license under the terms of the existing license
agreement for use by Microsoft of Spyglass Mosaic browser
1
<PAGE> 8
technology in Internet Explorer. Spyglass said it would recognize the
revenue from this payment in the second quarter of fiscal year 1997 ending on
March 31, 1997.
In a related announcement today, Microsoft and Spyglass said the two companies
intended to extend their strategic relationship in the future to develop new
technologies, expand distribution of their technologies and work cooperatively
on open standards in the embedded systems market.
In October 1996, Spyglass outlined plans for its strategy to establish a
leadership position in the Internet-device market, but cautioned that the rapid
transition from the desktop to the device market would put pressure on
short-term financial results.
During the quarter, Spyglass continued to solidify its leadership position in
providing World Wide Web technology to the Real Time Operating System (RTOS)
marketplace. In addition, Spyglass began licensing products and services
directly to office equipment and consumer electronics companies.
"Events in the quarter indicate our comprehensive strategy to assume a
leadership position in the market is working," said Doug Colbeth, Spyglass
president and CEO. "In fact, more than half of new revenues booked in the
quarter were device- and infrastructure-related. We also stepped up
investments in research and development to accelerate the strategy."
FIRST QUARTER EVENTS SPUR STRATEGY TO FOCUS ON INTERNET-DEVICE MARKET
Colbeth explained that first quarter 1997 "marked a critical transition period
for Spyglass." The company outlined plans to become the premier provider of
technology and professional services within the industry. Several events in
the quarter supported this effort:
o ROLLED OUT INTERNET-DEVICE STRATEGY - On December 2, 1996, the company
announced the details of a new device strategy designed to provide the
connectivity, infrastructure and applications necessary to support
multiple devices on-line. Industry analysts have praised it as "cutting
edge" and the most comprehensive offering they've seen.
o ADDED NEW RTOS AND DEVICE CUSTOMERS - Several new real-time operating
system vendors licensed Spyglass technology including Lynx Real-Time
Systems and PowerTV. In addition, the company signed key deals with
ViewCall America and WorldGate Communications, both major players in the
Web television market.
2
<PAGE> 9
o BUILT EXPERIENCED PROFESSIONAL SERVICES TEAM - The company invested
heavily in developing a strong professional services group with core
competencies in Java, RTOS development and software development
management. The company also announced the addition of Rich Houle, former
Sun Microsystems executive, to head up the research and development
organization.
o DELIVERED SURFWATCH PROSERVER - During the quarter, Spyglass delivered the
first new product in its strategy, the SurfWatch ProServer. Labeled as a
"killer app" by the Meta Group, the product is the world's first proxy
server with filtering capabilities.
o EXPANDED GLOBAL PRESENCE AND DISTRIBUTION - Spyglass announced Spyglass
Direct, a partnership with Unidirect, a major re-seller of computer
products, to handle channel sales of Spyglass SurfWatch products,
expanding opportunities for the company to concentrate on its
device OEM business. Also, Spyglass established European operations and
signed a joint-venture with Intercom Inc., Tokyo, to market and sell
products in Japan.
Colbeth said that the overall growth in the market is validating the Spyglass'
vision. In fact, Jupiter Communications predicts that the Internet device and
infrastructure marketplace will triple by the year 2000. Others estimate the
embedded software market to be a $5.2 billion industry by the year 2001.
COMPANY TO BUILD ON LEADERSHIP POSITION IN DEVICE MARKET
According to Colbeth, the company will move forward on building its leadership
position in a number of ways:
o Focus on three key market segments - consumer, industrial and commercial
device manufacturers.
o Continue to deliver new products.
o Aggressively invest in product development, and in Professional Services,
by building further expertise in embedded operating systems and Java.
o Market infrastructure/performance products to on-line device content
service providers like Web TV, WorldGate, PowerTV, cable companies, RBOCs,
cellular and satellite providers.
"We confirmed a great deal during the quarter that validated our strategy,
particularly that this market is very real and holds great potential." Colbeth
said. "We are ideally positioned as the premier provider of technology and
services to the device marketplace because we are the only vendor that offers
comprehensive and OS independent solutions. We are encouraged about
opportunities for growth."
3
<PAGE> 10
SPYGLASS INC.
Spyglass Inc. (NASDAQ: SPYG) provides software and services to make devices
work with the World Wide Web. Among Spyglass' OS device customers are
Integrated Systems, Inc., Lynx Real-Time Systems, Inc., Microware Systems Corp.
and QNX Software Systems, Ltd. Other customers include BellSouth, Computer
Associates, Inc., Digital Equipment Corp., IBM Corp., Microsoft Corp., Oracle
Corp. and WebTV Networks. Spyglass headquarters are located at 1240 E. Diehl
Road, Naperville, Ill. 60563; telephone: 630.245.6500; fax: 630.245.6693; press
email inquiries: [email protected]; Web server: http://www.spyglass.com.
-30-
(January 1997)
Spyglass is a registered trademark of Spyglass, Inc. The spyglass logo and
"Make the Net Work" are trademarks of Spyglass, Inc. in the United States and
other countries. Mosaic is a trademark of the University of Illinois.
Microsoft, ActiveX and Windows are either registered trademarks or trademarks
of Microsoft Corp. in the United States and/or other countries. (Other products
and brand names are trademarks of registered trademarks of their respective
companies.) This release contains information about management's future
expectations, plans and prospects which constitute forward-looking statements
for purposes of the safe harbor provisions under The Private Securities
Litigation Reform Act of 1995. Actual results may differ materially from those
indicated by these forward-looking statements as a result of various important
factors which are discussed in the company's annual report on Form 10-K for
the year ended September 30, 1996, which is on file with the SEC.
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,438
<SECURITIES> 0<F1>
<RECEIVABLES> 0<F1>
<ALLOWANCES> 350<F2>
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 40,913
<PP&E> 4,197
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 47,146
<CURRENT-LIABILITIES> 4,538
<BONDS> 0<F1>
0<F1>
0<F1>
<COMMON> 119
<OTHER-SE> 42,331
<TOTAL-LIABILITY-AND-EQUITY> 47,146
<SALES> 3,014
<TOTAL-REVENUES> 3,885
<CGS> 279
<TOTAL-COSTS> 459
<OTHER-EXPENSES> 6,357
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 0<F1>
<INCOME-PRETAX> (2,492)
<INCOME-TAX> (947)
<INCOME-CONTINUING> (2,931)
<DISCONTINUED> 0<F1>
<EXTRAORDINARY> 0<F1>
<CHANGES> 0<F1>
<NET-INCOME> (1,545)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
<FN>
<F1>Amounts inapplicable or not disclosed as a separate line on the Consolidated
Balance Sheets or Consolidated Statements of Operations are reported as 0
herein.
<F2>Notes and accounts receivable-trade are reported net of allowances for
doubtful accounts in the Consolidated Balance Sheets.
</FN>
</TABLE>
